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natiOnal OvErviEwThird Quarter 2013

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright© August 2013, Real Estate Research Corporation.

NATIONAL OVERVIEW

Economic Environment

The U.S. economy grew at an annualized pace of 1.7 percent in second quarter 2013, according to the Commerce De-partment’s Bureau of Economic Analysis (BEA), following downwardly revised growth of 1.1 percent in first quarter 2013.

Some analysts noted, however, that comparing growth from first quarter to second quarter did not take into ac-count the fact that some of the increase in second quarter growth was attributed to revisions to the data to include new categories that “better capture the U.S. economy,” such as research and development (R&D), entertainment, the arts, etc. Second quarter 2013 was the first time that these measures were included in the GDP, which raised the size of the current U.S. economy by $551 billion to $16.6 trillion in goods and services. According to these recalibra-tions, GDP expanded at a rate of 2.8 percent in 2012 instead of the previous estimate of 2.2 percent, per the BEA.

The unemployment rate remained unchanged at 7.6 percent in June 2013, according to the Bureau of Labor Statistics (BLS). Total nonfarm payrolls increased by 195,000 in June, and were comparable to the increases in May and April. However, the U-6 unemployment rate jumped significantly to 14.3 percent in June 2013, as the number of discouraged workers and part-time workers increased.

The housing market recovery continued at a brisk pace during second quarter 2013, thanks to an improving (albeit very slow) job market, strong investor demand, and increas-ing homebuyer confidence, despite higher home mortgage rates. Although short of expectations, the S&P/Case-Shiller Home Price Index showed that the 12-percent yearly gain in the 20-city composite at the end of May 2013 was the fastest pace since March 2006. However, both existing and pend-ing home sales declined in June, according to the National Association of REALTORS® (NAR).

Despite improved homebuyers’ confidence, retail spending lost momentum during second quarter. According to the Commerce Department, total retail sales increased only 0.4 percent in June 2013, and if automobiles and gasoline sales were excluded from the total, retail sales dropped 0.1 per-cent. Further, restaurant spending—generally considered “discretionary” spending—fell 1.2 percent in June, the larg-est decline in 5 years.

In the statement released at the Federal Reserve’s meeting on July 30-31, 2013, Chairman Ben Bernanke stated that based on information in June, economic activity expanded at a “modest” pace during the first half of the year (versus the “moderate” expansion he noted in the previous month’s statement).

As such, the Federal Reserve elected to keep the easy mon-ey spigot open, and announced that they will continue to purchase $85 billion in securities per month. While the Fed’s policy remains unchanged for now, they have made clear their target range for when tapering will end (about a year from now, with unemployment around 7 percent and inflation around 2 percent). Even though tapering has not officially begun, we should expect it to commence relatively soon, as the economy moves closer toward these targets.

What Does This Mean for Commercial Real Estate?

Second quarter 2013 commercial mortgage origination vol-ume increased 7 percent over second quarter 2012 volume and increased 36 percent over first quarter 2013 volume, ac-cording to the Mortgage Bankers Association (MBA). The 7-percent increase in year-over-year originations in second quarter 2013 included a 31-percent increase in the volume of multi-family property loans, a 3-percent increase for ho-tel property loans, a 114-percent decrease in retail property loans, and unchanged loan origination volume for office and industrial properties, per the MBA.

The MBA further noted that the 36-percent increase in sec-ond quarter 2013 originations over the previous quarter was led by an 89-percent increase in hotel property origina-tions, followed by a 75-percent increase for office proper-ties, a 48-percent increase for retail properties, a 44-percent increase for industrial properties, and a 22-percent increase in loan origination volume for multi-family properties.

As shown on the next page, RERC’s institutional investment survey respondents slightly lowered their rating for the amount of capital available to 7.5 on a scale of 1 to 10, with 10 being high, during second quarter 2013. However, they also lowered their rating for the discipline of capital, and with a discipline rating of 6.3 and an availability rating of 7.5, the gap between these two ratings continues to widen.

The equity markets continued their strong performance in second quarter 2013, although the stock market indices

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright© August 2013, Real Estate Research Corporation.

outperformed those for commercial real estate, including the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, the NCREIF Open-End Diver-sified Core Equity (ODCE) Index, and the National Asso-ciation of Real Estate Investment Trusts (NAREIT) Index. Despite the strength of stocks in second quarter, RERC’s in-stitutional investment respondents anticipate further vola-tility as tapering gets underway.

For more information about RERC’s research, please go to www.rerc.com.

What Do the Financial Markets Tell Us?

Compounded Annual Rates of Return as of 6/30/2013

Market Indices YTD4 1-Year 3-Year 5-Year 10-Year 15-Year

Consumer Price Index1 0.85% 1.89% 2.40% 1.39% 2.44% 2.42%

10-Year Treasury Bond2 1.97% 1.82% 2.33% 2.74% 3.57% 4.09%

Dow Jones Industrial Average 15.20% 18.87% 18.23% 8.64% 7.92% 5.86%

NASDAQ Composite3 12.71% 15.95% 17.29% 8.22% 7.69% 3.98%

NYSE Composite3 7.93% 16.80% 12.10% 1.02% 5.17% 2.69%

S&P 500 13.84% 20.60% 18.45% 7.01% 7.30% 4.24%

NCREIF Property Index 5.51% 10.73% 13.14% 2.79% 8.60% 8.99%

NCREIF ODCE 5.80% 11.29% 14.66% -0.31% 6.86% 7.88%

NAREIT Index (Equity REITS) 5.79% 10.21% 18.46% 7.72% 10.96% 9.67%

1Based on the published data from the Bureau of Labor Statistics (Seasonally Adjusted).2Based on Average End of Day T-Bond Rates.3Based on Price Index, and does not include the dividend yield.4Year-to-date (YTD) averages are not compounded annually.Sources: BLS, Federal Reserve Board, S&P, Dow Jones, NCREIF, NAREIT, compiled by RERC.

0

2

4

6

8

10

0

2

4

6

8

10

DisciplineAvailability

2Q 2013

2Q 2012

2Q 2011

2Q 2010

2Q 2009

2Q 2008

2Q 2007

2Q 2006

2Q 2005

2Q 2004

RERC Historical Availability & Discipline of Capital

Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.Source: RERC Institutional Investment Survey, 2Q 2013.

Rat

ing

NATIONAL OVERVIEW, CONT.

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright© August 2013, Real Estate Research Corporation.

Transaction Analysis

Total transaction volume declined to $71.02 billion in sec-ond quarter 2013 from $74.31 billion in the previous quar-ter on a quarterly basis according to Real Capital Analytics (RCA). However, volume for the individual property types (with the exception of the apartment sector) increased on a quarterly basis.

In addition, on a year-over-year basis, the total volume in-creased in second quarter 2013, along with the volume for each property type (except for the apartment sector). The year-over-year volume for the hotel and office sectors in-creased quite significantly compared to the volume for the other property sectors.

On a quarterly basis, the average price per square foot/unit increased for the office, retail, and hotel sectors in sec-ond quarter 2013, while the price for the industrial sector remained unchanged and the price for the apartment sec-tor declined, according to RCA. Although average prices for the retail, office, and apartment sectors spiked in fourth quarter 2012, prices have come back down to what inves-tors have come to expect in the past few years.

However, on a year-over-year basis, the average price per square foot/unit increased for each property type in second quarter, and particularly for the hotel sector.

Transaction Volume and Price

2Q 2013 YOY Change 1Q 2013 YOY Change 4Q 2012 YOY Change 3Q 2012 YOY Change

Volume (Mil)Total $71,017 13% $74,309 37% $110,620 64% $71,021 25%

Office $21,001 36% $17,434 9% $31,743 50% $17,841 6%

Industrial $9,710 3% $7,363 23% $16,754 94% $8,314 12%

Retail $13,498 9% $9,014 -30% $21,109 77% $9,338 3%

Apartment $16,991 -7% $31,146 130% $28,163 54% $27,716 80%

Hotel $7,145 83% $5,694 55% $7,709 62% $4,992 -19%

Average PPSF/PPUOffice $215 2% $208 2% $231 10% $209 -4%

Industrial $63 13% $63 -3% $63 5% $63 19%

Retail $175 5% $153 -4% $230 30% $148 -23%

Apartment $103,928 3% $114,341 8% $122,505 17% $105,696 -1%

Hotel $136,645 48% $116,401 -15% $123,590 9% $121,565 -6%Source: Real Capital Analytics, 2Q 2013.A special thanks to Real Capital Analytics (RCA) for sharing their national volume and pricing trends with RERC and for allowing us to reproduce them here for the convenience of RERC’s subscribers.

NATIONAL TRANSACTION ANALYSIS

RERC Required Going-In Capitalization Rates1 2Q 2013Office Industrial Retail Apartment Hotel

Weighted Avg. (%)2 6.7 6.7 6.5 5.3 8.0

BPS Change3 0 0 -10 0 0

1This survey was conducted in April, May, and June 2013 and reflects expected returns for Second Quarter 2013 unleveraged investments.2Weighting based upon 2Q13 NCREIF Portfolio market values.3Change (+/-) in basis points (BPS) from quarter immediately preceding current rate.Definition for Going-in capitalization rate: The first year NOI (before capital items of tenant improvements and leasing commissions and debt service but after real estate taxes) divided by present value (or purchase price).Source: RERC, 2Q 2013.

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright© August 2013, Real Estate Research Corporation.

REGIONAL PRE-TAX YIELD RATES*

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

All Pro

p TypesHote

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Apartment

Ret. Neig

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Ind. F

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Ofc. Sub

Ofc. C

BD

2Q 2012 2Q 2013

Perc

ent

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0West Region 2Q 2013 U.S. Average 2Q 2013

Perc

ent

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p TypesHote

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Apartment

Ret. Neig

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Ret. Pwr C

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Ret. Reg. M

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Ind. F

lex

Ind. R

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Ind. W

house

Ofc. Sub

Ofc. C

BD

West

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.52Q 2012 2Q 2013

Perc

ent

All Pro

p TypesHote

l

Apartment

Ret. Neig

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Ret. Pwr C

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Ind. F

lex

Ind. R

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Ind. W

house

Ofc. Sub

Ofc. C

BD7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0Midwest Region 2Q 2013 U.S. Average 2Q 2013

Perc

ent

All Pro

p TypesHote

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Apartment

Ret. Neig

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Ind. F

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Ind. R

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Ofc. Sub

Ofc. C

BD

Mid

west

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.52Q 2012 2Q 2013

Perc

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All Pro

p TypesHote

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Apartment

Ret. Neig

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Ret. Pwr C

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Ret. Reg. M

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Ind. F

lex

Ind. R

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Ind. W

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Ofc. Sub

Ofc. C

BD7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0South Region 2Q 2013 U.S. Average 2Q 2013

Perc

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Apartment

Ret. Neig

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Ret. Reg. M

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Ind. F

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Ind. R

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Ind. W

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Ofc. Sub

Ofc. C

BD

Sou

th

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.52Q 2012 2Q 2013

Perc

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All Pro

p TypesHote

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Apartment

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Ret. Pwr C

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Ind. F

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Ind. R

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Ind. W

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Ofc. Sub

Ofc. C

BD7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0East Region 2Q 2013 U.S. Average 2Q 2013

Perc

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East

Source: RERC, 2Q 2013.*Figures represent rates for first-tier investment properties.Definition for Pre-tax Yield (IRR, Discount Rate): The pre-tax yield is the rate of interest that discounts the pre-income tax cash flows received on an unleveraged investment back to a present value that is exactly equal to the amount of the original equity investment. (It is in effect a time-weighted average return on equity and, as used here, is synonymous with the term “yield.”)

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